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The Impact of the 2017 Goods and Services Tax (GST) on Packaged Food Industry in India

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The Goods and Services Tax (GST) was implemented in India to make India a unified common national market. Under GST, all packaged food products are now classified under only four tax rates, a shift from the earlier scenario of numerous tax brackets under which products were classified. Implementation of GST would effectively result in consumption of some packaged food products taking a hit in the near term due to higher GST taxation, while consumption of products with lower GST rates compared to

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GST to have multiple benefits for the Indian economy

GST aims to create “One Country One Tax One Market” by removing economic barriers between states. It will eliminate the present complex multi-layered indirect taxation system, making it possible for manufacturers to produce in one state and supply seamlessly across states without barriers.

In a price-sensitive market such as India, price elasticity has a profound impact on consumption of products. Staples such as edible oils and instant noodles have higher price elasticity compared to discretionary products such as cookies and ketchup. In case of price hikes due to GST on products with higher price elasticity, masses are most likely to downgrade or switch to substitute products including unpackaged or artisanal items.

Consumption of branded and packaged edible oils to pick up

Implementation of GST is expected to boost the consumption of branded and packaged edible oils. Given that edible oils are essential commodities, the GST rate fixed is significantly lower than prevailing rates. Branded players are expected to benefit as penetration of packaged edible oils is set to expand rapidly.

Dairy products could witness consumers shifting back to the unpackaged market

Other than for fresh milk, tax rates for majority of dairy products have been hiked under GST. Consumption of packaged butter, cheese and cooking fats is set to be impacted due to higher GST rates as these products have higher price elasticity. Consumers are likely to downgrade or shift to unpackaged offerings to overcome price hikes due to GST.

Plain biscuits consumption to be impacted the most within baked goods

Under GST, all biscuit types have been brought under a uniform GST rate of 18%. This is expected to drastically impact the consumption of plain biscuits which were previously taxed at just 8%. It also opens up new opportunities for cookies and premium biscuit players as consumer consumption patterns are expected to change with reducing price differentials between cookies and plain biscuits.